Analysis of GGP's Debt

The Wall Street Journal today has an interesting take on General Growth's debt situation. The company has a high level of debt on its books. It has consistently been able to refinance all its expiring debt. But as the article illustrates, the terms are more harsh than the company had become accustomed to.

One example of the lenders' upper hand can be seen in a $1.75 billion loan package Mr. Freibaum is piecing together. To get the deal done, General Growth had to grant lenders -- led by Germany's Eurohypo AG -- 25% recourse, a humbling requirement that lenders rarely sought from big companies such as General Growth during the real-estate boom.

[Bernie Freibaum]

Recourse provisions give lenders more ammunition to go after borrowers if they default. In this case, if there is a default and the value of the property pledged as collateral falls short of the loan amount, the lenders can force General Growth to repay as much as 25% of the loan amount through other means, such as selling other properties. The loan also carries lofty upfront fees of 0.5% to 1.5% of the amount lent.

The company confirmed the terms of the transaction but wouldn't elaborate. Mr. Freibaum declined to comment for this article.

"They're no longer in the driver's seat as far as determining the terms of their new debt," said Christy McElroy, an analyst at Banc of America Securities, adding that General Growth nonetheless has several funding options. "The lenders now have the leverage."


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